Discussion:1031 exchange with shareholder loan

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Discussion Forum Index --> Advanced Tax Questions --> 1031 exchange with shareholder loan
Discussion Forum Index --> Tax Questions --> 1031 exchange with shareholder loan

Taxdude2 (talk|edits) said:

26 March 2008
I have a client who has loaned funds to his S-Corp on a note, in which he is the sole shareholder. This S-Corp owned real property which carried mortgage debt with a bank, as well as the shareholder's note. The property sells for a gain, the mortgage and shareholder note are paid off, the net proceeds are used to purchase another like-kind property (within the required time frame), but for price about $280K less than the original property, and no debt.

My question is does the shareholder/S-Corp have to realize the gain on the entire amount of reduced mortgage debt, or "boot". It doesn't seem right that tax would be imposed on monies he borrowed to the Corporation to purchase the property. Isn't he just receiving a return of his contributed funds?

Please help me understand the options, if any.

RoyDaleOne (talk|edits) said:

26 March 2008
From the facts as posted I would bet you don't have a 1031 exchange.

Yes he is just receiving a return of his funds, however, the Corporation first received the funds and then paid the loan to shareholder, therefore, the Corporation is receiving the funds first.

Taxdude2 (talk|edits) said:

26 March 2008
As far as the 1031 exchange goes, I have seen all the documentation showing a qualified intermediary (Bayview Financial) holding the proceeds in escrow until the closing on the replacement property. I hope they gave this client some counsel regarding purchase of replacement property at a price less than the relinquished property.

RoyDaleOne (talk|edits) said:

26 March 2008
Good, you know what to do.

Taxdude2 (talk|edits) said:

26 March 2008
Would it make a difference if, at closing on the relinquished property, that the mortgage holder bank and the S-Corp shareholder were paid directly from the proceeds of sale? So, the funds did not pass directly to the Corporation to pay the shareholder.

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